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FX Comments
One important development two important articles.
The Swiss National Bank came into the FX market again today after the
E/CHF broke another critical milestone of 1.38
Tyler Durden did a
piece and discussed how quickly the benefits of the intervention
evaporated. He pointed to the fact that in less than two hours the E/CHF
was below the intervention levels.
JPM wrote a
report that summed up the critical issues. Their report was very
bearish for the E/CHF. Their argument is that the Swiss have now spent
1/3 of GDP in currency intervention and they have accomplished nothing.
The conclusion is that the Swiss will be forced to stop and let the Euro
to float to a much lower level.
Some thoughts on this.
-I wrote recently that I thought we were near to “the edge” of what
might be a major hiccup. We are there now. The status quo has to change.
We can’t have the SNB be the only force that is holding a market
together. They simply can’t absorb the daily supply. Either other
Central Banks step into the market in a visible and committed fashion or
there is going to be an FX explosion.
-The Swiss have failed miserably. The long-standing rules of this road
say you do not fight when you cannot win. They spent their chips
defending levels that proved unsustainable. Now they have too small a
pile of chips left. They simply can’t double up any longer. The
implications on money supply are already troubling.
-As T. Durden points out the sharks smell blood. What is the smartest
way to make money lately? Sell the E/CHF when the SNB comes in and bids
the cross up 1%. This trade has proved to be a money machine for those
that play. That will not stop. It will bring in more money every time
the trade succeeds.
The measure of successful currency intervention is whether the
intervention results in the re-establishment of two-way risk.
Speculators must be made fearful. They must feel some pain. The Swiss
have accomplished precisely the opposite. Hot FX money is now
emboldened. They have been making a killing at the expense of the SNB.
They have a pile of chips in front of them and are looking to ‘make the
year’.
-Possibly SNB head Hildebrand is in over his head. He is very popular in
Switzerland. He was an Olympic swimmer. An alpine Mike Phelps type of
hero. Here’s his bio. I’m sure he is a great guy, but a few years of
experience would be helpful if you wanted to take on the entire global
FX market.
In his youth Hildebrand worked as a bellhop at a
hotel in Davos, Switzerland, where he met many leading European
bankers. He attended the University of Toronto, Oxford University,
and the Graduate Institute of International Studies in Geneva.
Hildebrand was a member of the Swiss national swimming team and
reportedly almost qualified for the 1984 Olympic Games. According to
bloomberg.com, Hildebrand was the "youngest ever governing board
member when he joined the SNB in 2003.
With effect from 1 January 2010, the Federal Council appointed
him to the positions of Chairman of the Governing Board and Head of
Department I of the Swiss National Bank.Source: Wikipedia
-I have done a fair bit of wondering of late if the ECB is not using the
SNB as an intervention beard. CB’s intervene on behalf of other CB’s on
a regular basis. So it would not be without precedent. But it would be
bizarre if true. The magnitude is too large. There would have to be
public disclosure if the SNB had an E50 billion sneaky Pete side deal.
What causes me to consider this is that I find it incredulous that the
SNB is single handedly trying to stabilize/save the financial system.
-I estimate that the SNB had a book loss of CHF2b in just the past few
days. That would bring their losses year to date to around CHF8b. About
1,000 Francs per person. This “stealth tax” will not go unnoticed.
-I agree with the SNB when they say that a 1.35 exchange rate would be
deflationary. Deflation is being imported to Switzerland via the FX
market. That same deflationary force is in the US dollar exchange rate
versus the Euro. Question: What does a 10% adjustment in the Euro/$
mean to US GDP? It is not a small number.
-The dollar versus the CHF has been fairly steady at around 1.15. When
JPM says the E/CHF is going to 1.25 what they are really saying is that
the Euro/Dollar rate is going to ~1.02. A level that many have been
calling for. Another of those questions: What does a 14% move in the
E/$ do to S&P top and bottom line? It is not a small number.
-JPM suggests a put on one-year E/CHF at current levels with a target of
1.25. If you like that bet consider saving some premium expense and
forget the one-year horizon. This thing is moving faster than that.
Anyway, in a year from now we will be in a dollar crisis and everything
will look different.
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So is the basic idea here to sell US stocks once the euro is in paridoy or close to paridoy then head into the euro and wiat for Ben Bernake to save the US stock market again. Whatch the euro shoot back to 1.50 as the dollar plunges only to turn around and buy US stock with it once they have bottomed out?
who would take odds on that bet? Just curious.
We work our way progressively down John Exter's inverted asset pyramid. Even cash is now being debased.
Isn't it telling that many of us have so much unallocated cash - and the real problem is finding lucrative - or safe - places in which to place it?
This seems to be the major policy of gov'ts
worldwide. Punish savers mercilessly. Put them into
an ABC position (anything but cash). Get them to
buy...something....anything.... Stocks. Bonds. Real
estate. Cars. Heck, even gold.
Very nice, well thought article. Thank you.
Most analysts constantly try to downplay the importance of Europe on the US economy. Even though they are a nice piece of our overall export economy, they are also a huge piece to Asia. What affects one affects us all.
Solars, especially, are going to feel the pain with all the contracts they booked in Euros. Although, some hedged in that risk. I saw the same thing play out in 2008/09 when the Euro rate dropped and most solars pointed to it for their decreased earnings.
Thanks Bruce, you are giving us a crucial information, please keep up good work.
Nice work Bruce.
As sloppy and messy and erratic as the US is and has become and will yet be, I say last fiat currency standing wins. King Dollar will rule a year from now, and five years from now. Gold will be popular, but King Dollar will still rule, and its role as the world's reserve currency will only grow. However, the political implications that go with that prediction playing out as true will be formidable and have yet to play out.
Guns and gasoline, friends.
I agree with Ned that dollar is last man standing but ultimately it meets with a decreed 50% devaluation, coming fairly soon to a bank near you.
In a year, can the dollar be expected to be "in crisis" against anything other than gold?
a year for the $. a lot sooner is my bet. won't be able to make it to mid terms. getting out of control now.
I believe the ECB was intervening stealthily today right after the SNB. The pop in EUR/CHF (half of which lasted one minute) did hardly a peep for the EUR/USD - less than 20 pips, which was erased in 4 minutes. Following that, and when it was apparent that the SNB was done, the EUR/USD rose 60 pips over the next hour in a series of spikes. This was ahead of any market movement that would have caused a correlation move.
To go along with the timing of the Fed/Bernanke... I'll stand by my immediate interpretation of what I saw this morning.
The market is so confused that after hours market closed w/ triple long TNA up .5% and double short SDS up a .5%!?! Are we coming or going? Funny thing both of those bets will likely pay off for those willing to collect their winnings.
UofT ftw
Update: EURUSD moving along with ES now
I commented on another thread that the SNB should lend its euros to the ECB, at least to fund the ECB dollar swaps. I was joking at the time...
Agree, JP's trade looks wrong to me - though I dont have a good handle on EURCHF vol so its a little tricky to say.
To be clear, their trade is a digital option, basically a put spread. My point of view on the trade is on the JP thread. I dont like the expiry or the skew position.
http://www.zerohedge.com/article/jpm-ridicules-snb-intervention-tells-cl...
I'd like to congratulate Bruce for being on top of this Swiss Euro intervention story well before (I think) anyone else. It's now MSM headline news - just in case there is still any question in your mind as to where the go-to place for cutting edge financial news and analysis is...
I never thought the Swiss could win a Euro support game, not now anyway. I guess they should just whip out the 'So You Have A Really Strong Currency' pamphlet at this point. If this kind of appreciation were happening instead to the stock of a big American corporation the 'Go Buy Stuff' alarm would be going off in the boardroom right now.
Nice, very nice read and another great trade idea. Beautiful, most excellent.
Tx again BK, very timely as have also been trying to figure out what these guys are trying to achieve. My gnome would not answer my direct questions.
Not too much disrespect to the SNB gun, but there is something about sports people & an inflated sense of their own ability, post atheletic careers no?
Hopefully we will get answers to your key questions posed...
"Hildebrand worked as a bellhop at a hotel in Davos, Switzerland, where he met many leading European bankers."
Dude, where's my Central Banker?
That could mean he just carried their bags for a tip.
Wait a minute, he is still doing that.
and attending schools is not to be confused with graduating from them is it, or has the nomenclature changed?
+1 Euro
Bruce, why do you think the EUR/USD had been hanging tight at the 1.195 level at least the past three trading days?
Were it not for the Swiss it would be lower. As they support the cross it aids they E/dollar.
I would not have thought they had that kind of fire power but am happy to defer to your far superior knowledge of the subject matter.
i'd also like to hear yer answer, bruce (or anyone else's, for that matter).
i just keep scratching my head as to why 'this' level. i know the charts, know the pivots, etc.
...but why here? is there a non-techincal/charting reason? this concern for 'disorderly' markets is total bullschit.